This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.

Thursday, May 29, 2014

Sixth Circuit Reminds Us of the Importance of Careful Drafting

Sixth Circuit
Reminds Us of the Importance of Careful Drafting

In a recent decision, the Sixth
Circuit Court of Appeals was called upon to interpret a buy-sell
agreement.In the course of that
decision, the Court affirmed again the importance of careful drafting and as
well as rules of contractual construction.Howard v. Mercer Transportation
Company, Inc., __ Fed. Appx. __, 2014 WL 2119150 (6th Cir. May
21, 2014).

This dispute arose out of the
buy-sell agreement entered into amongst the shareholders of Mercer Transportation
Company, Inc., which corporation was apparently an S-corporation.It should be noted that all of the persons
involved were corporate shareholders notwithstanding the fact that they are
sometimes referred to as “partners.”

After the death of one of the
three owners, a dispute arose as to how the valuation provision of the buy-sell
agreement should be interpreted.Specifically,
the agreement provided that the company would pay the estate “all earnings of
the Corporation as reflected by the K-1 issued by the Corporation during the
year of death and the five years thereafter.”The dispute involved:

whether the phrase “during the year
of the death and the five years thereafter” modifies “earnings” (the estate’s
view) or “issued” (the company’s view). In other words: Does section 5.4
require the company to pay the estate its earnings (as reflected by the K-1
issued by the company) during the year of death and the five years
thereafter—earnings from 2008 through 2013? Or does section 5.4 require the
company to pay the estate its earnings that are listed in the K-1 forms issued
by the company during the year of death and the five years thereafter—earnings
from 2007 through 2012?

Notwithstanding a contrary
decision by the District Court, the Sixth Circuit unanimously held for the
estate’s reading, finding that only it would give effect to other provisions of
the document.While the company was able
to identify a fact situation, namely the death of the second shareholder, in
which some conflict would exist between those provisions, the Court applied the
rule that:

Kentucky law discourages an
interpretation of the agreement that it will allow part of section 4.1 to “perish
by destruction, unless insurmountable obstacles stand in the way of any other
course.”Siler v. White Star Coal Co., 226 S.W. 102, 104 (Ky. 1920)
(internal quotation marks omitted).

From there it went on to observe
that:

But no principle of contract law
suggests that an interpretation of an agreement that always makes one provision redundant wins out over an
interpretation that sometimes makes
that provision redundant.2014 WL
2119150, *3.

The Court also noted that
extrinsic evidence would not be relied upon in interpretation until after “the
resources of the paper itself [are] exhausted,” it citing Akins v. City of Covington, 97 S.W.2d 588, 590 (Ky. 1996).